A couple of months ago I wrote here about 1300 Smiles (ONT), the successful Queensland-based dentist practice aggregator. 1300 Smiles could well have based its business model on its state compatriot, veterinary clinic aggregator Greencross (GXL).
Australia’s first listed veterinary group, Greencross listed late in 2007 with 32 veterinary practices. It now has 84 practices (45 in Queensland), seven emergency centres, two specialist centres, two pathology laboratories and two pet cremation sites.
The business proposition revolves around buying existing veterinary surgeries, use the business’ scale and streamlined business practises to improve profitability giving the vets all of the business support they need and letting the vets focus on looking after their patients. The model suits older vets who are looking to cash-out from the practice they’ve built, and younger vets who are less keen than their predecessors to commit to buying their own practice. Greencross currently employs more than 1,200 vets, nurses and support staff.
Veterinary services is a highly fragmented industry in Australia, with more than 2,650 locations owned by 1,865 enterprises. Greencross is now the largest provider of vet services in the nation, but it has a market share of just 3.5% of the locations and 5.7% of the veterinary revenue in Australia.
The vet services industry revenue is approximately $2.55 billion, of which about $2.165 billion, or 85%, is spent on “companion animals,” or what used to be known as pets.
Under the one banner, Greencross develops its business through benchmarking and coaching activity, the use of social media and electronic direct mail, client and team surveys and Net Promoter Score programs, remuneration and reward programs, supply chain partnerships and education programs.
A good example of the engagement this can drive is its Healthy Pets Plus proactive healthcare plan, launched in May 2012. Under this plan, for an annual fee, pets get a yearly blood screening, urine and faeces check, as well as unlimited free consultations and food advice. There is a feline plan and a canine plan.
Devised by one of Greencross’ vets and instituted across the whole network, the program is designed to detect and identify any health issues before they potentially lead to expensive treatment. Owners can pay in monthly instalments, spreading the costs over a 12-month period and avoiding the “bill shock” of one-off visits to the vet. Greencross is targeting 18,000 Healthy Pets Plus members by the end of the current financial year.
For the year ended June 30 2013, Greencross lifted revenue by 30% to $106.7 million, with underlying net profit up 35% to $6.38 million. Underlying earnings per share rose by 21.6% to 18.71 cents. The dividend increased by 2 cents, to 10 cents a share, fully franked. Same-clinic revenue rose by 5.4%, twice the average annual revenue growth for the vet industry of 2.7%.
The company said at the result announcement that acquisitions will continue to be the largest driver of growth for the company, with one to two new acquisitions to be targeted per month, funded through a mix of bank finance, free cash flow and vendor deferred payments. The acquisitions typically use a mixture of cash and scrip: the sales contracts include claw-back provisions that require the vendor to meet certain financial targets or repay part of the purchase price to Greencross.
Greencross will also target the opening of a minimum of two new veterinary hospitals over the next 12 months, continuing to build a vertically integrated business: from vet clinics to specialist centres combining surgery, animal behaviour, dermatology, cardiology, ophthalmology and dentistry, to pathology laboratories to hospitals, all the way to pet funeral businesses.
For FY14, the analysts at CBA Institutional Equities reckon Greencross can earn net profit of $8.7 million, or 23.3 cents a share, rising to $10.9 million, or 29.2 cents a share, in FY15. At $6.89, that prices Greencross on a prospective FY14 price/earnings (P/E) ratio of 29.6 times earnings, and 23.6 times FY15 earnings.
Greencross is a dividend payer, but no-one is buying it for yield. CBA Institutional Equities is looking for a dividend of 11.7 cents in FY14, fully franked, followed by 14.6 cents in FY15. That’s nice growth, but at 1.7% yield in FY14 and 2.07% in FY15, the stock is not a yield play.
Given the company has plenty of room to grow in a very fragmented industry, there is still expansion potential if Greencross continues to execute its acquisition strategy effectively. CBA Institutional Equities rates Greencross a strong buy.
